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New world economic order anyone?

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Seoul G-20 summit to set agenda for new economic order

By Lee Joon-seung
SEOUL, Oct. 10 (Yonhap) — The upcoming Seoul G-20 summit is expected to set the key agenda and lay the foundation for a new post-crisis economic order that will promote sustainable development for all countries, economists say.

Experts from thinks tanks such as the state-run Korea Institute for International Economic Policy (KIEP) and the Korea Institute of Finance (KIF) said that while contentious issues may not be resolved, broad understanding of financial reforms and balanced growth should be reached when leaders meet next month in the South Korean capital.

“The Seoul meeting is expected to mark a turning point in the role of the G-20 from one focused on managing a global financial crisis to a gathering that aims to regulate a new economic order,” Yoon Deok-ryong, a senior fellow and head of the KIEP’s G-20 research team, said a month before the start of the economic summit slated for Nov. 11-12.

He said the G-20 countries have all felt the need to create a new order to prevent a repeat of the Lehman Brothers debacle and ongoing financial uncertainties in some European countries.

The expert said there has been headway on key issues like the creation of a global financial safety net, implementation of tougher oversight over so-called significantly important financial institutions (SIFI) and the framework for strong, sustainable and balanced growth (SSBG).

Yoon said in the arena of creating a safety net regime, which encompasses a reform of the International Monetary Fund (IMF), countries have effectively endorsed the “Korea Initiative” that aims to provide swift relief to fundamentally sound countries temporarily under a liquidity crunch. Many emerging economies underwent sudden capital outflows and saw the value of their currency weaken in the height of the global financial crisis.

“There are details to be ironed out about eligibility and other issues, but creating a ‘precautionary credit line’ in the IMF to help ease emergency liquidity problems of fundamentally sound countries has secured support,” he said.

On the priority of enforcing tighter financial regulations, Nam Gil-nam, a regulatory expert at the Korea Capital Market Institute, said G-20 members have for the most part concurred there is a need for better oversight of systemic risks, for governments to maintain a fiscal balance and for rigorous supervision of SIFIs whose collapse could send shock waves throughout the world.

“The Basel III accord, or the New Bank Capital and Liquidity Rules, were reached in September and will be forwarded to the leaders coming to the Seoul summit for approval,” he said.

He pointed out that in broad terms, most issues linked to the financial sector regulations have been discussed in detail since the first G-20 summit in Washington in November 2008, so there is general support for enhancing the credibility of credit rating agencies and better regulation of over-the-counter derivatives products and hedge funds.

While it may take time for countries to pass laws and make regulatory changes similar to the U.S.’s Dodd-Frank Act, there is consensus that more control is needed to safeguard the world economy from troubles caused by large financial institutions, he said.

Related to SSBG, also referred to as the “Framework,” experts said that much more work needs to be done to ensure an understanding in this field, although growing downside risks caused by slowdowns in some leading economies may prod G-20 members to accept changes.

“Countries are currently working on multi-year action plans that reflect their respective needs and economic conditions that will be moved forward at the G-20 summit,” said Chang Min, head of the KIF’s macro-financial research office.

The “Framework” is a source of friction because it calls on countries to set fiscal, monetary, trade and foreign exchange policies that do not disturb the sustainable balanced growth of other countries. The issue was touched on at in the Toronto summit but was left to be dealt with in Seoul to give countries more time.

The economist said that this issue is sensitive because there is considerable resistance and diverging views, particularly between countries with large trade surpluses and those that run a chronic deficit.

He pointed out the United States and the European Union are pushing China to change its foreign exchange position, while Beijing is resisting such pressure and warning that a sharp appreciation of the Chinese yuan could threaten global economic stability.

South Korean President Lee Myung-bak has already said that the issue of foreign exchange will be discussed at the Seoul summit, pointing out the need for countries to work together on this agenda item.

The economist also said that other SSGB issues like the need to levy a carbon tax, reduce trade protectionist measures and provide aid to developing economies all call for contributions and sacrifices that G-20 members may not be able to pursue due to various economic and political constraints.

Government officials on the G-20 organizing committee and at the finance ministry echoed Chang’s view, saying that more contentious SSGB issues may have to be addressed in the next summit that will take place in France.

“The issue will probably be touched on at the two-day-long gathering, but it may be handled in a manner similar to the bank levy controversy with working and expert groups being set up to deal with the issue,” said an official who declined to be identified.

In regard to the IMF reform that is part of the broader global financial safety net agenda, local experts said G-20 negotiators are working to reach a compromise that could allow a viable action plan to be created in Seoul.

G-20 countries at the Pittsburgh summit in September 2009 concurred that stakes held by European countries should be transferred to developing economies, but no country has come forward to relinquish their share.

South Korea said that it wants a greater stake in the IMF and has been at the forefront of pushing for a change in the Washington-based organization so it can be more responsive to the needs of member countries in times of crisis.

Other issues on IMF reform may deal with allowing the U.S. to hold onto its de facto veto power that it exercises by controlling a 17 percent stake in the IMF.

“If a ‘real’ breakthrough is made on the IMF issue, this could boost the significance of the Seoul summit since it will be tangible and lead to changes that can have an immediate effect,” a policymaker said.

Local economists and government officials, meanwhile, said that South Korea’s hosting of the G-20 summit is a step forward for the country, especially if the gathering of leaders yields broad results to make the global financial sector more safe and enhance balanced growth to help less developed countries.

Seoul has pledged to share its economic growth experience with developing economies and has called on other G-20 members who will be present for next month’s summit to do more for balanced growth.

South Korea has pointed out that helping to stimulate the economies of developing countries can ensure that the world continues to grow in the future while reducing suffering caused by poverty.

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